Monday, January 16, 2012

DuPage Water Commission

A slew of mistakes and bad decisions led to the DuPage Water Commission completely depleting its reserve funds, according to the 64-page confidential forensic audit report obtained by the Daily Herald.
The report was compiled by the commission's special counsel Jenner & Block, which was hired after the missing reserves were discovered in October, 2009. They did not find evidence of any illegal activities.
The commission distributes Lake Michigan water to more than two dozen municipalities and agencies.
The report chronicles the negligence of former financial administrator Max Richter, lackadaisical financial oversight by former General Manager Bob Martin and the internal division among the six municipal-appointed commissioners and the six county-appointed commissioners that helped keep the fiscal errors from being revealed.
The report was released to the commission March 2. In its wake, Martin resigned last week after 23 years with the commission, and Treasurer Richard Thorn resigned Tuesday. The water commission has yet to make the report public.
To avoid a repeat, the report makes several recommendations. They include appointing future commissioners with financial expertise, making the treasurer a paid nonstaff position responsible solely to the commission, more detailed and consistent financial reporting, restricting access to accounting programs and segregating financial duties regarding depositing and reporting.
Bad accounting is essentially the root for the spending of the commission's entire reserves that were falsely reported to be at $109 million in 2007, but were actually just $69 million. Believing they were flush with cash, the commission approved a $40 million rebate to municipalities and a rate reduction in February 2007. That depleted the reserves to $29 million, but commissioners believed there was more than double that amount left in the reserves. A capital improvement plan was approved that spent the remaining funds. Declining sales tax revenues that were sometimes spent on operations against commission policy, faltering investments and the sale of water to customers at a rate cheaper than it was being purchased from Chicago also bled the commission's funds, the report states.
But it was Richter's "intentional misconduct and gross negligence" that investigators say is chiefly to blame for the fiasco, though the report states "there is no clear and convincing evidence of fraud."
Richter's time
Hired in 2005 as the commission's third financial adviser since its inception in 1985 - and second in less than a year - Richter received good reviews from Martin during his first two years, according to the report. But by 2008, his performance began to slip and it was noted in later reviews that Richter "needed to make fewer errors in financial reporting."
Richter had been hired amid a state legislature-approved $75 million "raid" of the commission's reserves by the county, the report noted. For five years starting in 2003, the county was to receive $15 million a year. Richter apparently didn't have a firm grasp of the situation and his 2007 budget forecasts included a continuation of the $15 million payments to the county essentially in perpetuity.
That error was caught by Commissioner Allan Poole who wrote to Martin in December 2006 apprising him of the Richter's "snafu." But instead of just deleting the entry, Richter added $15 million to the previous year's beginning balance. That move began the over-inflation of the commission's reserve fund. Three more accounting errors that added phantom $15 million and $12 million entries to reserves while subtracting $2 million created the illusion of $40 million extra in reserves, according to the report.
Richter's failure to fully implement his department's transition from financial reporting based on Excel spreadsheets to an accounting software package also allowed the mistakes to grow and fester, the report states.
These errors wouldn't come to light until Richter was placed on a four-week medical leave in September 2009. Martin brought the commission's original financial administrator Rick Skiba back to handle finances while Richter was out. It was Skiba who uncovered the reserve depletion that forced the commission to take out a $30 million loan in December to cover costs and consider another $40 million loan pay all of its construction debt.
Richter was fired in October after being confronted about the accounting mistakes by Martin and the commission's attorney, according to the report. Several commissioners said Richter did not receive any severance package and will not collect a pension.
But the report doesn't stop blame with Richter; it indicates Martin and the commission had a hand in exacerbating the damage done by Richter.
Current members of the commission said they could not discuss the confidential report. Attempts to reach Richter and Martin were unsuccessful.
Internal strife
Martin had been with the commission as assistant to the general manager from 1987 to 2004. When the commission's original general manager stepped down, Martin threw his hat in the ring for the post and told then-commission Chairman Michael Vondra that he would leave the commission if he didn't get the commission's top job, the report states. He was the interim general manager while a nationwide search was conducted.
Martin was selected over four other candidates by a split vote of the commission in 2005. The report states that municipal appointees voted in favor of Martin, while county appointees voted against him. The tie was broken by the commission chairman, who is appointed by the county.
"We heard from virtually everyone we interviewed about the division on the (commission) between county and municipal factions and observed it ourselves during board meetings," the author of the report wrote in one of the document's footnotes.
The division stems from the county getting $75 million of the commission's reserves and fear by municipal appointees of a "second raid" of the reserves by the county, the report states.
County appointees argued against Martin because he lacked a financial and accounting background. He has an engineering background. He told the board he would make up for any accounting deficiencies by hiring a "competent financial administrator to report to him," according to the report.
The report paints Martin as hands-off manager when it came to financial matters, saying he "did not meaningfully supervise the financial administrator." The report also indicates Martin could have discovered the reserve depletion in March 2009 "by simply reading the treasurer's report." When interviewed for the forensic audit, Martin said he relied on the commission's attorney and Richter's underlings to catch some of the accounting mistakes because he busied himself "putting out fires."
As part of his severance agreement, Martin will be paid a half year's salary amounting to more than $90,000 and a full year's insurance coverage.
Meanwhile, the commission is chastised in the report for failing to "place qualified individuals in the general manager or treasurer positions." The report calls the commission's finance committee "meaningless," because it "had no greater access to information than other board members and did not exercise significant oversight of financial statements or projections."
Some longtime commissioners like Poole and county-appointee Liz Chaplin are singled out for praise in the report for their efforts to try to alert the commission of the financial problems only to be rebuked by staff or fellow commissioners.
The commission's auditing firm escaped substantial blame because the investigation revealed the firm was never given any of the inaccurate spreadsheets Richter created, "though they, too, made mistakes," according to the report.

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